European stress tests: analyst reaction

Eight European banks are not strong enough to withstand a prolonged recession
and need to raise €2.5bn (£2.2bn) in capital, an industry healthcheck aimed
at reviving investor confidence showed on Friday. Here is what some top
analysts said of the news.

'Any bounce from this will be short-lived'

6:05PM BST 15 Jul 2011

Pedro de Noronha, managing partner at Noster Capital

"This was nothing more than a PR exercise ... They fail to address the issue of what happens when one of the European sovereigns restructures and/or leaves the euro [and sadly that's a matter of when not of if as any person with basic math skills can easily figure out] ... you can't "stress test" the domino effect of such an event."

Hank Calenti, head of bank credit research at Societe Generale

"We're going to have to beat the numbers up now to see what's really there. We'll be focused on the banks [with core Tier 1 capital ratios] in the 5pc to 7pc range, as they'll have to be at 7pc by January 2013.

"The amount of capital that needs to be raised by the [failed] banks fails to impress, but baked into that number are measures already taken through announced capital raisings. Any bounce from this will be short-lived."

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Ajay Rawal, senior director at Alvarez & Marsal

"The EBA was widely criticized for not including a sovereign default scenario but this would have been a tacit admission that current actions will fail and, worse, probably would have been a self-fulfilling prophecy.

"The major banks in the UK are well ahead of the curve and the latest stress tests haven't revealed anything new. The biggest concern the UK banks face is what they will have to put in the ICB's proposed ringfence and the implications of having to hold the recommended Tier 1 capital cushion of 10pc - that's well above the stress test scenarios."

Geraud Missonnier, trader at Saxo Banque

"All the Italian banks have passed the test. This is reassuring for the eurozone, and the overall number of banks that have failed the test seems somewhat lower than what the market had been expecting. Overall, we don't see much impact from this on the equity market, it's been priced in already."

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Frederik Nerbrand, global head of asset allocation at HSBC

"On a top-line basis it was pretty much in line with expectations. Having said that, the expectations weren't set very high, given the fact that the stress scenario isn't adverse enough to make the stress test really worthwhile. It wasn't going to show that very many people had failed."

Michael Symonds, credit analyst at Daiwa Capital Markets

"With only eight banks failing and the requirement for these banks to raise €2.5bn in capital, it wasn't the solution to restore confidence. What was needed was for more banks to fail and for more capital to ultimately be raised.

"That being said, I don't think people really expected that outcome. But the solution to the wider sovereign/bank malaise in Europe needs to go beyond simply pumping more capital into the continent's banks. That's the underlying message, the solution's gone beyond that."